Monday, February 9, 2009

Trade

We are in difficult economic times. The collapse of the housing bubble has had repercussions in other aspects of the economy. Banks, faced with default mortgages, are now unwilling to lend. With capital frozen, business cannot expand or grow. Hiring freezes, and employees are let go to cut costs. In this climate, everyone looks to government to create jobs and protect jobs. Populism and protectionism become popular.

This is evident in the creation of the current economic stimulus package that is being debated on Capitol Hill. The House and the Senate have passed two different bills, which must be resolved in conference committee. The House version contains, “Buy American,” clauses to insure that the government money spent will go to American businesses, buy only American products and, “protect,” American jobs.

It is easy to understand why such measures might be popular in these economic times, but they are extremely short sighted. No one makes an effective argument for truly free trade. Trade proponents argue that it creates jobs, opponents point to the jobs lost. The truth is, in any free and competitive market there will be winners and losers. This gives each side examples to point to, but confuses the public at large that is trying to decide, on balance, whether open trade or protectionism would be better.

However, these, “practical,” arguments about whether free trade costs or creates jobs miss the larger moral issue at stake. What defines a free society is freedom of choice. Our Constitution enshrines some freedom of choice in the First Amendment – our government is not allowed to dictate what you can say (or think), cannot prevent you from assembling peacefully, and cannot tell you what to believe or what god to worship. True liberty, however, requires that this freedom of choice extend to economic activity as well. What empowers consumers is having multiple businesses providing goods and services competing for the consumers' business. The consumer then can choose amongst various options the product he or she judges is of reasonable quality and/or a reasonable price. Monopolies or trusts exploit the consumer by denying choice and either force the consumer to accept inferior quality or charge the consumer exorbitant prices. The competition of a free market prevents this economic exploitation.

Protectionism similarly exploits consumers. Freedom and both political and economic power are maximized when the consumer has more choice. Limiting access to foreign goods, or subsidizing domestic ones, or inflating the prices of imports through tariffs, limits choice and forces the consumer to accept higher prices than the market would otherwise bear. What helps a narrow segment of the population (those that work in the industry being protected) exploits everyone who consumes goods and services and hurts us all. Economic freedom of choice is so crucial to liberty that, in the same sentence of the Declaration of Independence that charges King George III with the tyranny of taxing the colonies without representation, Jefferson also labelled George III a tyrant, “for cutting off our trade with all parts of the world.” It is no less exploitive to restrict consumer’s access to the fullest selection of goods and services today through trade barriers as it was in Mr. Jefferson’s day or when the lord of the manor would insist that all his serfs use the lord's mill exclusively.

Furthermore, economic protectionism is no longer practical in the 21st century. The world and the U.S. economy have changed over the last century. The airplane, the telephone, the cellular phone, the computer, the internet, and broad-band internet access have made the world smaller. The world is now, to borrow Tom Friedman’s phrase, flat. It is now much easier to market goods and services to all parts of the globe, buy from and sell to all parts of the globe, and collaborate with others in every corner of the world. These technological innovations make it impossible to build a wall around fortress America and remain internally self-sufficient. As developing countries can manufacture simpler things less expensively, our economic growth depends on being a center of innovation for the new goods and services of tomorrow. We cannot continue to do that unless we take advantage of the same tools – a worldwide talent pool and the ability to maximize profit by outsourcing tasks that others do better or less expensively – as our competitors will. The truth is, we have no business manufacturing something if we can’t make it better or cheaper and we will need to have open access the world’s resources if we are to continue to innovate. This means our workforce will have to have more flexible skill sets and gone are the days where working on the same assembly line provides a lifetime of job security. This is neither bad nor good, it simply is. Our policies must reflect this reality and trying to protect the industries of the 20th century, burying our heads in the sand, will lead to a long-term lack of competitiveness that stunts our economic growth and allows competitors to pass us by. Buy American provisions will simply encourage others to close their markets to our goods and services and lead to escalating trade wars that will deprive us of the competitive advantages and opportunities of full participation in the global marketplace.

The Buy American provisions in the economic stimulus package are a poison pill that threatens our liberty and long-term economic prosperity. President Obama has voiced his disapproval of these provisions, but if they remain in the final bill, they will prove and interesting test of the new President’s leadership. If such provisions are in the final bill, President Obama should veto it. President Clinton took on elements in his own party when he promoted NAFTA, can President Obama do the same? If these provisions are in the final bill, will President Obama have the political courage to veto a stimulus package that most of the country believes we need in the face of the economic crisis and ask Congress for a new bill without these provisions? I, for one, certainly hope so.

2 comments:

David said...

Jim,

Another excellent essay. I would add that the interconnectivity of the world (it's flatness) makes it a requirement to deal easily with other countries - just to survive. Just the mention of "Buy American" (the most Un-American thing you can propose) has already affected countless decisions that others are making concerning where to locate their plants, whether to deal with a European or American company for part 'x'. The short-sighted politicians are digging a deeper hole.

Even more to the point, though, the whole concept of a 'stimulus package' has never really been justified. Market corrections need to happen (even when they were originated by non-market, government forces) and pretending otherwise will only make the situation worse. These Keynesians could just be laughed at if they weren't so dangerous.

Publius said...

Sadly, the final stimulus bill retains the Buy American provisions and President Obama appears poised to sign it. I am afraid he has failed his first real test of leadership. With a 60-70% approval rating, he should have been able to demand the bill he wanted, rather than settle for the bill he got...